If you own your own business, over time two things are likely:
The best way to understand the advantages of a Split Dollar Policy is to understand how it is paid for, in comparison to a Traditional Policy.
Traditionally, Life Insurance is purchased with money out of the business owner's personal account. This money was likely paid as salary, which is heavily taxed as it moves from the business bank account to owners personal account.
With a Split Dollar Policy, the company loans the owner money to purchase the insurance policy, avoiding steep salary taxes. The owner only has to pay interest on the loan, which is typically less than the tax they would have otherwise incurred.
For the business, repayment of the loan is guaranteed by the Life Insurance policy, while the owner’s beneficiaries still receive the benefit from the policy tax-free if anything happens.
This type of Split Dollar Policy is called the Collateral Assignment Method and is typically reserved for people who are owners or shareholders in a business.
There is a second type of Split Dollar Policy called the Endorsement Method, which is for employees who are not shareholders. It is structured differently, but can still be used to increased expected ROI on the purchase of a life insurance policy. Typically, the Endorsement Method is used as a perk tied to compensation, severance, or stock purchases. However, I'll save the finer details for a separate post.
Each Split Dollar Insurance Policy has their own tax nuances and benefits. To learn more, email us or consult a tax professional.
Insurance isn't complicated, as long as it's explained :)
I’m the Director of HR at Humi, and I’m obsessed with all things people and human resources. Throughout my time working in a range of industries, I’ve learned that one thing is clear: the world of work is changing and HR professionals are leading the charge.
I believe that businesses should know their people as well as they know their product. But people are complex, and the solutions aren’t always easy. That’s how Think with Humi will help.
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